week 7 10. The French Thaler and Company\'s stock has paid dividends of $1.60 ov
ID: 2665902 • Letter: W
Question
week 710. The French Thaler and Company's stock has paid dividends of
$1.60 over the past 12 months. Its historical growth rate of dividends
has been 8 percent, but analysts expect the growth to slow to 5 percent
annually for the foreseeable future.
a. Determine the value of the stock if the required rate of return
on stocks of similar risk is 15 percent.
b. If analysts believe the risk premium on the stock should be
reduced by 2 percentage points, what is the new required rate
of return on French Thaler and Company stock? By how
much should its price change from the answer you computed
in (a)?
Explanation / Answer
a) P = D0(1+g)/(k-g) D0 = 1.65 ($) g = 5% = 0.05 k= 15%=0.15 P = 1.65*1.05/(0.15 - 0.05) P = 17.32 ($) (ANSWER) b) If risk premium falls by 2%, required rate of return = 15 - 2 = 13% = 0.13 (ANSWER) P = 1.65*1.05/(0.13-0.05) =21.66 ($) (ANSWER)
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